Food Delivery (Food Tech) Industry Analysis

The Foodtech Industry is a 3D marketplace involving 3 Major Stakeholders- Customers, Delivery partners and Restaurant partners all connected through the aggregator’s app. Customers order via the app and pay for Food + Delivery + Tips + Packaging to the aggregator and the aggregator pays its delivery partner the delivery fees + tips + bonus (if any). It passes on the amount received for food to the restaurant partner after deducting its commission and advertising fees (if any).

Here’s a visual representation of the same

Source: Zomato Filings

Revenue and Expense Streams

Summary of the above chart in terms of Revenue and Expenses for Aggregators

Unit Economics

AOV (Average order value) of Foodtech Companies is ~ INR 380 ($5.1), these companies take a commission ranging from 20-26% from the restaurants, let us take the median figure of 23%, so the average commission earned per order turns out to be 23% of 380 = INR 87 ($1.35). Adding a normal delivery fee of INR 30 ($0.4) makes the revenue per order INR 100 + INR 30 = INR 130 ($1.75). They pay their delivery partners approximately INR 75 ($1) [Basic pay of INR 60 adjusted to INR 75 to account for bonus on delivering a certain number of orders in a given time frame] per order, hence taking home the gross margin of INR 12 ($0.16) per order.

Now, these startups spend a good chunk of money to attract new users (called CAC- Customer Acquisition Cost). Remember the 50% discount you got the first time you placed your order on Swiggy/Zomato or the referral bonus you received for referring the app to your family and friends?

That’s CAC. Now this CAC is somewhere around INR 150 ($2). So to recover this amount of INR 150, they would need the customer to order ~ 12 times (CAC/Gross Margin=150/12)- this is called the payback period.

Remember the INR 12 (± 5) we calculated, it is before accounting for any Discounts or Other Variable Costs (comprising of payment gateway charges, support cost, restaurant partner refunds and other variable spends on account of activities like delivery partner onboarding, delivery partner insurance, SMS, cash on delivery handling and call masking, among others). So if we factor all these costs as well, the net contribution (Revenue-Costs) becomes negative, which is exactly the case with almost all of the foodtech startups right now. Now you know why these startups raise funding from VCs and PEs so frequently- they bleed very fast. If they don’t raise funding, they will be buried to the ground the moment their funds dry up. One of the many reasons Zomato is launching an IPO, to raise funds, but this time from the public.

How do these startups bear such huge discounts?

Actually, they don’t, or atleast the whole of it. When these companies sign a contract with a restaurant partner, a clause inserted in there specifies how much % of the discount the company will bear and it turns out, it is not much as you’d expect. For example, if a restaurant partner wishes to activate a discount coupon- say FRESH30 having 30% discount upto INR 100, these companies bear only a small part of it- around 8-10%, the remnant 20-22% is borne by the restaurant partner.

Here’s an email a restaurant partner received from Zomato:

Food Delivery Wars

Two sharks standing tall right now in India are Zomato and Swiggy after the acquisition of Uber Eats India by Zomato. Uber probably realised that the food delivery juice is not worth the squeeze, and on top of that, the probable 3rd shark has entered the business- the cash-rich Amazon- The company that consumers love, rivals hate, politicians love to hate and investors have learned to never bet against.

Swiggy and Zomato *sweating profusely*.

I mean who wants a monster like Amazon entering their industry?

Amazon’s deep pockets may end the duopoly of Zomato and Swiggy in the Indian Market and the biggest beneficiaries would obviously be the customers- Amazon looks forward to a flying start offering crazy discounts in the beginning to mark its grand arrival. This would force the other two to up the ante and offer similar discounts to prevent ceding market share to Amazon hampering their ambitions of becoming profitable anytime soon. So, great news for customers, but not so great for the current firms as it might even yank out many of the early-stage companies. As Taleb says “Become antifragile or die”.

Amazon’s entry will be a litmus test for the existing foodtech companies.

Global FoodTech

Biggest International Food Delivery Companies

The major international counterparts of Zomato and Swiggy, namely Uber Eats, Doordash & GrubHub are also struggling with their bottom line. So even in the developed countries, there isn’t one foodtech company that has proved its business model and which can now be called a success. Many startups are experimenting with different business models- some betting on the subscription model (Companies like Blue Apron, HelloFresh, and Plated are in the meal kit service through subscription, but are overwhelmed by competition), some are pivoting to e-groceries, some are launching their B2B, some focusing on cloud kitchens.

Swiggy and Zomato are also trying incredibly hard to diversify into other niches:

Since they have realised Food Delivery Model is too complicated to crack and no company in the world operating in that industry is bottom line positive, atleast for now.

The reasons are :

1) Intense competition with more and more foodtechs sprouting up

2) No Customer Loyalty- the switching cost for customer from one food delivery app to another in the hunt for better discounts is zero.

The Biggest Catch-22

Early stage companies in the pursuit of growth, in order to satisfy their unquenchable thirst for crazy funding rounds, can be led astray into making decisions that might not necessarily be prudent- Offering huge unsustainable discounts around the year to fuel growth, while the big boys in the Maturity Stage- Swiggy and Zomato who are looking to get listed are becoming more and more cautious of their bottom line to keep the party going. And rightly so.

The recent numbers of these behemoths show the following trends:

  • Delivery Charges (from customers) ↑
  • Delivery Charges (to delivery partners)
  • Subscription Fees (from customers) ↑
  • Commissions (from rest. partners) ↑
  • Discounts

This clearly points towards one conscious aim-Higher AOV. These companies want to purge the small orders by taking the incentives away- “10% discount for only Orders above INR 400”. Lower orders are what dragging these companies into the mud. They make too little commission on these orders which does not sustain their high fixed costs- Maintaining the Tech Infrastructure, Delivery Infrastructure, Customer Acquisition & Retention Cost, Marketing and Branding Costs. The failure to recover the fixed costs is the only impediment to their path to profitability.

Further, they are finally trying to slash their ridiculously high advertisement and promotion costs to slide their way to see a positive number in their bottom line.

But there is a catch, both these efforts to push them into profitability will most likely come at the cost of their top line growth. Slashing Ads, discounts, increasing the delivery charges etc will put the brakes on their Revenue and User Growth- ceding away the market share to firms in the early stage of the product life cycle.

So maybe finding a sweet balance between the top line and bottom line growth will be their next big task for years to come and more so after raising money from the public.

Final Comments

Food Delivery is here to stay despite the gargantuan losses given the amount of value this space holds which is only going to increase in the years to come by. Gen Z does not like cooking, they rely more on food deliveries and as a result, the global food delivery market is expected to grow at a healthy rate of 11% to reach $192 Bn by 2025.

Predicting which company will capture the lion’s share in this space in the upcoming years is not clear yet.

What do you think? Let us know in the poll below and discuss how you think these companies can come out of the mud hole in the comments below!

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Until next time!

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